A review of Walter W. McMahon, Higher Learning, Greater Good: The Private and Social Benefits of Higher Education (Johns Hopkins University Press, 2009).
Higher education, despite being declared a priority by federal and provincial governments, is under severe financial pressure and facing increasing competition for public dollars. The challenge to Canadian higher education is not only the real possibility of seeing public funding decrease while student numbers are going up but also of finding funding being ever closer tied to what is perceived to be ‘useful’ programs and research. With escalating costs and increasing enrollment but no new public money, there is pressure to commercialize higher education further, through increasing tuition fees, investing an even larger share of research dollars to sectors seen to provide the best economic return, and linking higher education and research more strongly to the private sector. Some argue for a further move in the direction of privatization, while others argue that what is required is more public funding. Thus, it is not surprising that there is a growing interest in the private and social benefits of higher education and discussion of who should pay for what. Professor McMahon’s book, Higher Learning, Greater Good: The Private and Social Benefits of Higher Education is central to this debate. While focusing on higher education in the U.S. much of what he discusses is highly relevant to the Canadian policy debate. According to McMahon, the three core questions we need to answer while considering higher education policy are:
1. What are the new needs of higher education in a modern globalized economy. Stated differently, what should the higher education’s mission be when considering the race between the contribution of research creating new knowledge and the need by the population at large to acquire skills necessary to keep up?
2. What is the level of total investment in higher education by both private and public sources that is economically efficient for growth and broader developments?
3. Has the degree of privatization of higher education gone too far to be economically efficient in serving the greater good?
In answering these questions the author seeks to influence policy as well as the field of the economics of education. The book presents a perspective on human capital theory that attempts to account more fully for the total private and social market and non-market benefits of higher education — and their total costs. The author skillfully helps the reader understand how a lack of accurate information about these benefits negatively affects both private and public investments in higher education resulting in market failures. So, for example, recent privatization trends tend to neglect the value of the non-market private and social benefits of education, a neglect which results in an external as well as internal distortion in the allocation of funds. One way this happens is through an undervaluation of the contributions of academic research where patents are not possible. We seldom reflect on how fields like law and political science through their impact on civic institutions have significant indirect effects on future growth and development. The same goes for fields such as English and mathematics. As McMahon explains, if the contribution of these fields to growth were more adequately measured, it would most likely lead to their getting more attention and support and result in a smaller distortion of academic priorities. The author also draws attention to another source of distortion, the lack of understanding of the value of private non-market benefits, which are relevant to an efficient private investment by students and their families.
The author manages to present economic theory in such a way that non-economists can appreciate what such a perspective brings to the discussion about higher education. The reader becomes aware of how education makes private contributions beyond one’s income by affecting family health, children’s cognitive development, as well as happiness and longevity. The reader is enlightened about how “efficiency” includes the externalities involved in serving the public good, including both internal efficiencies relating to unit cost and how well the outcomes relate to social benefits expected by society. This may sound abstract, but it forces us to consider what balance in the degree of privatization is optimal. Thus, if the social rate of return (measured properly) is found to be higher than the average return obtainable from other investments (or on other uses of tax funds) then more should be invested in higher education, if society is to be economically efficient in achieving faster economic growth and development. The author also provides insights into how better to interpret the rising costs of higher education. So, for example, contrary to common belief, the increases in investment costs in the U.S. have been lower than generally understood. While institutional costs have gone up considerably, there has been only a marginal rise in foregone earning, which makes up about half of the total costs.
McMahon draws several far-reaching conclusions regarding the present financing of higher education in the U.S.A. For example, the data on social rates of return strongly suggest that investment in human capital through higher education have, for quite some time, been below optimum and that there is more under-investment in higher education than commonly believed. He argues that issues around access, affordability, accountability/quality, and privatization (perhaps also skill deficit) have a common underlying major cause — funding. In contrast to what is sometimes suggested in the sociological literature, he finds little or no basis for suggesting that there is a skill surplus in society. According to the author, the increasing education of custodians, bus drivers, farmers, doctors, researchers, and others is not over-education. Instead, it is the higher productivity of the human capital skills embodying the new technologies that raises the demand for these skills in relation to their supply, as their productivity is recognized by the employers and market. In support for this argument, he offers data showing that earnings of college graduates in comparison to high school graduates have grown significantly since 1980 and showing the rapid increase in jobs that require two- or four-year college degrees. On this point, it would have been worth noting that widening income gaps have been fueled more by an actual decrease in salaries paid to high school graduates than increases paid to those with a college degree.
More convincing is his evidence about the private non-market as well as social benefits of higher education. According to estimates, the total per-year value of the private, non-market benefits for a bachelor’s degree is as high as $38,080 for each additional year. This represents 78 per cent of the earning increments for the average male and 122 per cent for the average female. This figure is higher than previously estimated, which can be explained by the inclusion of a fuller set of non-market benefits. The author points out that as private non-market benefits tend to play little importance in students’ or their families decision to invest in higher education’, they are highly likely to under-invest.
McMahon finds the value of the non-market, public goods benefits for a completed bachelor’s degree to be almost equal to the average increment to earnings. These benefits come from the direct benefit of higher education to quality of life, as well as its contribution to democracy and what follows from that. In addition, the author also points to externalities generated by higher education in the form of the indirect effects that contribute to the private market and non-market benefits. These come from the long-term benefits from earlier generations’ participation in higher education. The inclusion of these benefits in the benefit calculation helps resolve some controversy in previous research that showed smaller returns to investment in aggregated data, as compared to what is found in studies using micro-data. The author notes that these social benefits are not well understood by policy makers or the public, which gives rise to market failures and fuels under-investment in higher education.
Although not presenting any estimates, the author, in connection to externalities, touches on the fact that higher education policies can be designed to increase participation by groups traditionally not going to university and, in this way, lower inequalities. As an economist, he links this to the maximization of happiness in society and whether higher education policies reduce or increase the degree of inequality in income in later ages and, hence, on the kind of society most desire for the nation’s future. However, he cautious the reader that whether or not inequality should be reduced, is a philosophical issue and not pure economics. However, he also notes that this standard position among economists now must take into account the new research on the economics of happiness.
The calculations of externalities are important in light of a steadily increasing privatization in the U.S. as well as Canadian higher education. The relative share of institutional costs covered by public funding has gone down, and there is a shift of cost to students and their family. This leads to the question, how much of this is economically efficient? If the externalities of higher education are 52 per cent it follows, according to the author, that 52 per cent of total investment, consisting of institutional costs plus forgone earnings, needs to be supported by government and endowments. Thus, 48 per cent should be covered privately through tuition fees and forgone earnings (roughly room and board), if economic efficiency is to be achieved. Consequently, he argues, colleges and universities whose funding is fully private are not efficient since this must include providing for the external benefits that include charity and the public good. Using the criteria of externalities, McMahon reaches the conclusion that the privatization of higher education in the U.S. has gone too far to be efficient. However, he notes that in most countries of Europe the reverse is true and a lack of private investment seriously undermines quality.
In addition to clarifying the benefits of investment in undergraduate education, the book also sheds new light on the greater good of research in ways that seriously question government’s present funding strategies. With research increasingly being linked to economic prosperity, the impact of research is narrowly defined in terms of commercial outcome or, at the best, in terms of a combination of commercial outcome and health. However, as McMahon’s calculations suggest, this distorts the actual impact of various fields of research. The author stresses the importance of realizing that the benefits from research are largely externalities, which means that they are social not private — although, through patenting, some become private benefits. Not fully accounting for the social benefits of research has consequences for higher education policy in that the capacity to privatize the benefits of applied research by patenting often leads to a distortion of research priorities.
A second important theme in the chapter on research is that the knowledge created by research is embodied in master’s and PhD students as new human capital is formed.
From a growth theory perspective, the author argues, we have to look more closely at the complementarities between graduate education and research to understand the benefits of research. This highlights the often-underestimated but highly important benefit that universities provide to research by the creation, dissemination, and adoption of new knowledge. This occurs as the cumulative results of existing knowledge, new research results, and skills are transferred to graduate students through formal instruction and apprenticeship. Creation of new knowledge through research and the creation of new human capital are so deeply entwined that the results of investment in research and of investment in graduate education are inextricably linked. If a dynamic view of the process is taken, some fields make unique additional contributions to GDP growth, though indirectly. For example, in cross-country studies, basic literacy is revealed to be critically important for economic growth, and advanced literacy is highly prized in business and government employment. Further, there are non-market benefits from graduate education that embody new knowledge created by research that contributes to human welfare and the quality of life, apart from earnings and growth of GDP.
One of the major contributions of McMahon’s study is the detailed analysis of the direct and indirect contributions different academic fields to private and social benefits. His findings reveal that fields such as engineering and business administration have substantial direct but small indirect effects. In fact, most of the indirect benefits to economic growth come from research and graduate studies in the liberal arts. Contrary to common belief, liberal arts contribute as much as 42 per cent of the total contribution that higher education and research makes.
Another central observation by McMahon is that the benefit depends on how close the state or country is to the technological frontier. Thus, the highest benefits to investment in research master’s and PhD degrees occur in high-income states like California and the Eastern Seaboard. A public investment strategy for higher education would need to pay close attention to the surrounding economy, and investment in graduate studies and research may sometimes not be the most profitable avenue to go.
It is high time that we in Canada carry out a similar analysis of higher learning and greater good and conduct an expansive investigation of the private and social benefits afforded by the Canadian system of higher education.
Kjell Rubenson is with the Centre of Policy Studies in Higher Education and Training, University of British Columbia